China Real Time recently asked Mr. Wedeman about how China’s experience with corruption differs from that of other countries and what corruption is likely to mean for China’s development going forward. (CRT may or may not have given him a red envelope full of used non-sequential 100 yuan notes in return for the inside scoop.)

Wedeman: Growth rates in China rose well above the global average even as corruption intensified following the adoption of economic reforms in the early 1980s. So China posses a puzzle: Why didn’t rising corruption cause growth rates to fall? Even more puzzling: Corruption in China resembles some of the worst predatory forms found in countries where rampant graft has wreaked economic havoc.

You talk about the difference between ‘developmental’ corruption’ in South Korea, Taiwan and Japan, and ‘predatory’ corruption in China?

One of the dirty secrets of high speed growth in the East Asian Tigers is that the developmental states rested on a foundation of corruption. Money flowed from business to the ruling party, which redistributed it to political stalwarts and voters to forge stable ruling coalitions.

China is different because the Communist Party does not depend on injections of cash from the private sector. As a result, whereas dirty money was an integral part of the developmental success in South Korea, Taiwan, and Japan, in China corruption fits the classic definition — the misuse of public authority for private gain.

Economic reform in China has created new opportunities for corruption on a grander scale?

Stripped to its barest essentials, economic reform in China involves the transfer of property rights from the state to the market.

The nominal value of these assets is often well below their market value. So if the buyer can get the asset at its low state-set value, they can earn windfall profits often by simply reselling control rights to a third party.

The existence of large windfall profits creates strong incentives for officials to demand bribes from recipients and for buyers to kickback a share of the expected windfall profit.

Far from stimulating rapid growth, corruption in China feeds off rapid growth. In essence, corrupt officials are stripping off a share of the profits created by reform.

In some sense, this may give them incentives to support economic reform, but I think the political drive to reform and marketize China’s economy does not come from officials’ lust for corrupt income.

But in the long term, most experts think graft will weaken China’s economy – what’s the doomsday scenario?

In the long term, graft will harm the Chinese economy — we can readily see the harmful effects. If the Chinese Communist Party fails to check corruption it could begin to undermine the health of the Chinese economy.

But I am not sure there is a “doomsday scenario.” Amidst all the hype about corruption gone wild in China, it is often forgotten that even though it is worse than the global average, it is not a level on a par with what we might call crisis corruption.

My sense is that if corruption were not controlled then it would begin to become more of a drag on growth rates, particularly as the extent of asset transfers decrease and overall growth rates slow. But corruption alone would not push the economy into collapse.

You are more optimistic – what’s your theory?

I have more confidence in China’s war on corruption than others, not because it will significantly reduce corruption, but in the much more modest sense that they have managed to prevent the problem getting significantly worse.

If you look at either the number of individuals charged with corruption or the estimates of the severity of corruption in China by outside experts, corruption has been at about the same level for nearly a decade.

We are entering the last year of the Hu Jintao Wen Jiabao administration. How do you rate their success in combating corruption?

Mixed. They are fighting an uphill battle against corruption. At the start of the reform period, legal structures and institutions had just been resurrected. Investigators and prosecutors have had to combat corruption on the fly and were often scrambling to keep up.

It was not until the mid- or even late 1990s that China possessed a basic anticorruption capability. Those institutions have continued to improve, but there is still room for considerable strengthening, particularly in the area of fighting high level corruption.

Under Hu and Wen, a number of very senior and powerful officials have been indicted and prosecuted, which shows some determination to take the fight to the upper ranks. But I do not see evidence that significant inroads were made.

Former Chongqing chief Bo Xilai rose to prominence in a crackdown on corruption, now he has been ousted and his old right hand man Wang Lijun is under investigation. What’s your take on the case?

It’s a tangled mess. Chongqing was clearly a cesspool of organized crime and high level graft before Bo and Wang. While it seems clear that Bo and Wang took out a lot of the gangsters and their cadre allies, it is far from clear if they took out all of them or if perhaps they drove one mob out and let another take over. If anything, the current Bo-Wang case illustrates the complex and daunting tasks associated with trying to bring corruption under control in China.

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